MINING & SOCIAL ISSUES with Ignatius Kamwanje: Cut Off Grades, Costs and Production Rates in Mining

The first element of any mining project is mining itself or rock extraction. Mining is very complex in strict sense as such, involves a set of interrelated activities before an ore can be extracted.

Starting with the Mine or Grade Control model which represents the grade and quantity of ore in space, it now remains to calculate the least expensive way to get an ore out of the ground. Usually this means moving the least amount of waste. A grade control model can be thought of as set of blocks which could measure 25 meters long by 25 meters wide by 10 meters high with a single grade representing the ore value. So, the end result is manipulation of all possible ways that can take the blocks apart to get a good ore material and this is possible by running computer assisted simulation models or programmes.

(a) Cut -off Grade

The cut-off grade is that grade of material (volume or weight of ore divided by the total bits of stuff) below which mining is uneconomic. Or it is the amount of the ore that must be obtained from mining a given amount of material in order that all the costs are recovered and no profit is left. Calculating the cut-off grade involves a mini-feasibility study in which all the known and potential costs of the project are accounted for.

Models of “orebodies” are formulated as early as possible in the exploration cycle and this is doubly true for the calculation of a cut-off grade. Having a model of the mineral occurrence leads inevitably to a calculation of the tonnage and grade of the occurrence. For any given assumptions about costs, the analysis can determine the amount of ore that needs to be found and at what grade in order that the project is attractive. If there is no hope in finding the size or grade of deposit, then the project can be dropped as early as possible thereby saving lots of money.

(b) How to calculate the cut-off grade

There are some techniques for calculating the cut-off grade. The most easily understood involves calculating the annual net cash flows for the proposed operation at 3,4 or more different, realistic grades for the assumed deposit and then calculating the net present value for the operation at these selected grades. When this is done, a graph of net present value versus grade can be drawn and that grade at which the project net present value is zero becomes the cut-off grade of the mined ore.

This methodology includes the cost of the capital to build the project and is a more useful tool in determination for new and proposed projects than just looking at the operating costs of the operation.

If the project has been around for a number of years and the original investment has been paid back (payback period sustained amicably) then including the original capital cost is not important. So, when one reads the companies reports which mention cut-off grades it is always very important and realistic to investigate how they define this grade.

The costs to calculate the cut-off grade must involve all the capital used in purchasing the property, exploration, engineering and construction, working capital and any ongoing capital costs to maintain the project (replacement of equipment, painting tanks etc.) These are the initial and sustaining costs. Then there are the ongoing operating costs for the mine, plant, supervision and overheads, maintenance, tailings, marketing, head office and minesite allocations, interest, royalties, taxes and a list of other mostly forgotten expenses. These, one might notice, are all the elements necessary for a feasibility study.

(c) Aspects of a feasibility Study

In a feasibility study, there are really only three issues that need to be settled;

– Does the technology exist to accomplish the goals established for a given project?

– Will the project generate revenues that pay back all the capital and operating costs plus generate a return for the investors?

– Does anyone in the world want to buy what is going to be produced and will they sign a marketing letter of intent?

– Will the government grant a permit to develop the project?

This question involves environmental and social development sensitivities which rightly have to be addressed in a way which improves the life of the general population in the area.

The conceptual or feasibility stage of a mining project commences with the collection and verification of enormous amounts of data ranging from topographic surveys, drilling information, bench scale metallurgical testing, infrastructure surveys and a whole host of environmental surveys. Feasibility studies are generally required for any significant commercial venture and mining is no different. It seems simple enough but these studies typically involve teams of so many specialists, months of time and millions of dollars. What follows then is a description of the elements of a mining feasibility study.

When the data has been accumulated, indexed and verified, the feasibility study can begin. A feasibility study is an insurance policy for the project success. Feasibility design must consider everything from mine design, production rate, building foundation, slope or excavation stability, mining method, equipment selection, water control, sources of process water, sources of contamination, building construction, plant layout, power sources, emissions controls, process technologies, dilution and recovery, marketing, transportation, sources of construction materials, sources of manpower, impact of large capital projects on the local economy (inflation impact), animal migration patterns, rare plants and animals, land claims, local business opportunities and lots of other considerations as well. The whole point of the conceptual design is to develop a list of major materials and labour from which an estimate of the cost to build, maintain and operate the facilities is calculated. Added to this is an assessment of the market into which the mined and processed ore will be sold to calculate how much money will be made.

When all these costs are put into a financial model, one quickly gets a sense of whether the project is worth pursuing or not. If the model is built early in the exploration cycle then one can get a sense of how many tonnes and at what grade the ore needs to be in order to make a mine. If subsequent exploration determines that the tonnage and grade targets can’t be met then there is an argument to drop the project and look for something else.

In the early days of the project, there will be lots of assumptions rather than data but by testing the assumptions in the model, one can determine which costs are most important to project success and work can be directed to getting more data in the areas that are important. For example, if the type of milling process is the most important factor in determining project success then rather than drilling holes maybe it is best to spend the money on metallurgical testing (extractive metallurgy). This is because the manner in which the minerals occur is an important determinant of operating cost. Without a financial model, companies always spend the money on drilling but this is not always the best allocation of the money.

(d) Production Rates

Once the mine is designed with all the necessary roads, wall slopes, water drainage systems, power distribution systems and waste dumps, stockpiles it is necessary to create a schedule for the removal of the ore and waste material and the reclamation of the slopes or benches that are left behind. This is an iterative process that starts with the selection of a production rate. To determine the production rate, it is usually sufficiently accurate to take the proven reserves(an estimated quantity and grade of part of a deposit for which the size, configuration, and grade have been very well established by observation and sampling of outcrops, drill holes, trenches and mine workings) and divide them by either 10 or 15 years. The mine design provides a table of ore and waste volumes for each bench or stope (depending on whether the mine is open pit or underground). With this table it is simply a matter of calculating the waste to be removed to get the required ore otherwise known as the Stripping ratio for each year (or quarter or month) of the project or mine life. There are millions of possible schedules but are quickly narrowed down into real possibilities which can then be calculated – reduced into a spreadsheet format.

(e) Mining Costs

When the production schedule has been prepared then it remains to determine the size and quantity of mining equipment required to meet the production requirements. This is largely an exercise in applying actual experience and lots of factors into real world using few simple equations.

With the production schedule and equipment list at hand, one can then calculate the annual number of hours for each piece of equipment based on the productivities of the equipment selected. Multiplying the number of hours by the cost to operate the equipment per hour gives the operating cost. Dividing the annual number of hours required by the annual number of hours available for a single piece of equipment results in the number of pieces of that type of equipment required each year. And finally, the design of the mine and the cost to build and operate it is determined.

The Author, Ignatius Kamwanje, is a Consulting Geoscientist with experience in Mineral Exploration, Mining Geology, ESIA, Ground Water Resources and Occupational Safety, Health and Environment.

He can be contacted on: igkamzy @yahoo.com – 0999216869.

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This piece was initially published in Malawi’s Mining & Trade Review Issue Number 61 (May 2018).

The full edition is available for download here. This monthly publication is edited by Marcel Chimwala.